Balancing Access with Accuracy for Infant HIV Diagnostics in Tanzania (B) Net Present Value (NPV) / MBA Resources

Introduction to Net Present Value (NPV) - What is Net Present Value (NPV) ? How it impacts financial decisions regarding project management?

NPV solution for Balancing Access with Accuracy for Infant HIV Diagnostics in Tanzania (B) case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Balancing Access with Accuracy for Infant HIV Diagnostics in Tanzania (B) case study is a Harvard Business School (HBR) case study written by Kara Palamountain, Sachin Waikar, Andrea Hanson, Katherine Nelson. The Balancing Access with Accuracy for Infant HIV Diagnostics in Tanzania (B) (referred as “Diagnostics Hiv” from here on) case study provides evaluation & decision scenario in field of Leadership & Managing People. It also touches upon business topics such as - Value proposition, Emerging markets, Entrepreneurship, Marketing, Product development, Technology.

The net present value (NPV) of an investment proposal is the present value of the proposal’s net cash flows less the proposal’s initial cash outflow. If a project’s NPV is greater than or equal to zero, the project should be accepted.

NPV = Present Value of Future Cash Flows LESS Project’s Initial Investment

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Case Description of Balancing Access with Accuracy for Infant HIV Diagnostics in Tanzania (B) Case Study

The Global Health Initiative (GHI) is a tripartite collaboration among Northwestern University, non-profit donors, and commercial diagnostics companies. GHI attempts to bridge the gap between the market for sophisticated medical diagnostics equipment in wealthy nations and the need for point-of-care diagnostics in resource limited settings. In 2006 GHI narrowed its focus to HIV diagnostics for underserved nations. The case examines the accuracy-access tradeoff related to the roll-out of infant HIV diagnostics in Tanzania. Tanzania has a prevalent HIV/AIDS problem, particularly in children. As of 2007, Tanzania had an estimated 140,000 children infected with HIV. Existing lab-based diagnostic equipment was either inaccurate for use in infants or required highly skilled health workers. Tanzania's limited infrastructure also forced healthcare providers to choose between providing advanced care to a minority of the population and offering minimal care to the majority with poor access. A Kellogg MBA student research team performed more than thirty in-country interviews to collect data on stakeholder perceptions of three infant test concepts: the strip test, the squeeze test, and the filter paper test. Across the three tests, access decreased as accuracy increased-rural labs could not find or afford health workers skilled enough to conduct the test. In general, interviewees closely affiliated with the government preferred accuracy over access. In contrast, private health facilities had to follow fewer regulations and preferred access over accuracy. The case focuses on the decisions facing Kara Palamountain, the executive director of GHI, in her roll-out recommendations for infant HIV tests in Tanzania. It examines key factors of working in a developing country, including the need to operate in the absence of sufficient market research, balance the competing agendas of different stakeholders, and mitigate external risks such as major international funding drying up.

Case Authors : Kara Palamountain, Sachin Waikar, Andrea Hanson, Katherine Nelson

Topic : Leadership & Managing People

Related Areas : Emerging markets, Entrepreneurship, Marketing, Product development, Technology

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Calculating Net Present Value (NPV) at 6% for Balancing Access with Accuracy for Infant HIV Diagnostics in Tanzania (B) Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10004400)	-10004400	-	-
Year 1	3453671	-6550729	3453671	0.9434	3258180
Year 2	3972919	-2577810	7426590	0.89	3535884
Year 3	3951678	1373868	11378268	0.8396	3317905
Year 4	3243862	4617730	14622130	0.7921	2569443
TOTAL			14622130		12681412

The Net Present Value at 6% discount rate is 2677012

In isolation the NPV number doesn't mean much but put in right context then it is one of the best method to evaluate project returns. In this article we will cover -

Different methods of capital budgeting

What is NPV & Formula of NPV,
How it is calculated,
How to use NPV number for project evaluation, and
Scenario Planning given risks and management priorities.

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Capital Budgeting Approaches

Methods of Capital Budgeting

There are four types of capital budgeting techniques that are widely used in the corporate world –

1. Profitability Index
2. Net Present Value
3. Internal Rate of Return
4. Payback Period

Apart from the Payback period method which is an additive method, rest of the methods are based on Discounted Cash Flow technique. Even though cash flow can be calculated based on the nature of the project, for the simplicity of the article we are assuming that all the expected cash flows are realized at the end of the year.

Discounted Cash Flow approaches provide a more objective basis for evaluating and selecting investment projects. They take into consideration both –

1. Timing of the expected cash flows – stockholders of Diagnostics Hiv have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.
2. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Diagnostics Hiv shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.

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Formula and Steps to Calculate Net Present Value (NPV) of Balancing Access with Accuracy for Infant HIV Diagnostics in Tanzania (B)

NPV = Net Cash In Flowt1 / (1+r)t1 + Net Cash In Flowt2 / (1+r)t2 + … Net Cash In Flowtn / (1+r)tn
Less Net Cash Out Flowt0 / (1+r)t0

Where t = time period, in this case year 1, year 2 and so on.
r = discount rate or return that could be earned using other safe proposition such as fixed deposit or treasury bond rate. Net Cash In Flow – What the firm will get each year.
Net Cash Out Flow – What the firm needs to invest initially in the project.

Step 1 – Understand the nature of the project and calculate cash flow for each year.
Step 2 – Discount those cash flow based on the discount rate.
Step 3 – Add all the discounted cash flow.
Step 4 – Selection of the project

Why Leadership & Managing People Managers need to know Financial Tools such as Net Present Value (NPV)?

In our daily workplace we often come across people and colleagues who are just focused on their core competency and targets they have to deliver. For example marketing managers at Diagnostics Hiv often design programs whose objective is to drive brand awareness and customer reach. But how that 30 point increase in brand awareness or 10 point increase in customer touch points will result into shareholders’ value is not specified.

To overcome such scenarios managers at Diagnostics Hiv needs to not only know the financial aspect of project management but also needs to have tools to integrate them into part of the project development and monitoring plan.

Calculating Net Present Value (NPV) at 15%

After working through various assumptions we reached a conclusion that risk is far higher than 6%. In a reasonably stable industry with weak competition - 15% discount rate can be a good benchmark.

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 15 %	Discounted Cash Flows
Year 0	(10004400)	-10004400	-	-
Year 1	3453671	-6550729	3453671	0.8696	3003192
Year 2	3972919	-2577810	7426590	0.7561	3004098
Year 3	3951678	1373868	11378268	0.6575	2598292
Year 4	3243862	4617730	14622130	0.5718	1854689
TOTAL					10460271

The Net NPV after 4 years is 455871

(10460271 - 10004400 )

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Calculating Net Present Value (NPV) at 20%

If the risk component is high in the industry then we should go for a higher hurdle rate / discount rate of 20%.

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 20 %	Discounted Cash Flows
Year 0	(10004400)	-10004400	-	-
Year 1	3453671	-6550729	3453671	0.8333	2878059
Year 2	3972919	-2577810	7426590	0.6944	2758972
Year 3	3951678	1373868	11378268	0.5787	2286851
Year 4	3243862	4617730	14622130	0.4823	1564362
TOTAL					9488244

The Net NPV after 4 years is -516156

At 20% discount rate the NPV is negative (9488244 - 10004400 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Diagnostics Hiv to discount cash flow at lower discount rates such as 15%.

Acceptance Criteria of a Project based on NPV

Simplest Approach – If the investment project of Diagnostics Hiv has a NPV value higher than Zero then finance managers at Diagnostics Hiv can ACCEPT the project, otherwise they can reject the project. This means that project will deliver higher returns over the period of time than any alternate investment strategy.

In theory if the required rate of return or discount rate is chosen correctly by finance managers at Diagnostics Hiv, then the stock price of the Diagnostics Hiv should change by same amount of the NPV. In real world we know that share price also reflects various other factors that can be related to both macro and micro environment.

In the same vein – accepting the project with zero NPV should result in stagnant share price. Finance managers use discount rates as a measure of risk components in the project execution process.

Sensitivity Analysis

Project selection is often a far more complex decision than just choosing it based on the NPV number. Finance managers at Diagnostics Hiv should conduct a sensitivity analysis to better understand not only the inherent risk of the projects but also how those risks can be either factored in or mitigated during the project execution. Sensitivity analysis helps in –

What are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

What are the uncertainties surrounding the project Initial Cash Outlay (ICO’s). ICO’s often have several different components such as land, machinery, building, and other equipment.

What will be a multi year spillover effect of various taxation regulations.

Understanding of risks involved in the project.

What can impact the cash flow of the project.

Some of the assumptions while using the Discounted Cash Flow Methods –

Projects are assumed to be Mutually Exclusive – This is seldom the came in modern day giant organizations where projects are often inter-related and rejecting a project solely based on NPV can result in sunk cost from a related project.

Independent projects have independent cash flows – As explained in the marketing project – though the project may look independent but in reality it is not as the brand awareness project can be closely associated with the spending on sales promotions and product specific advertising.

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Negotiation Strategy of Balancing Access with Accuracy for Infant HIV Diagnostics in Tanzania (B)

References & Further Readings

Kara Palamountain, Sachin Waikar, Andrea Hanson, Katherine Nelson (2018), "Balancing Access with Accuracy for Infant HIV Diagnostics in Tanzania (B) Harvard Business Review Case Study. Published by HBR Publications.